Business

<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, July 13, 2008 How to get capital flowing back into the U.S. By James McCusker Imagine what would happen in homes around the country if a television newscaster were to say, "And now we're going to talk about some accounting rules changes." The rush to grab remote control devices would be so instinctive, so violent and so immediate that many innocent people would be hurt. Real life decisions aren't always exciting. In the movies it's different. The hero or heroine often has to make tough choices; that's what drama is all about. But their decisions always involve life and death, happiness and sadness, good and evil. In real life, we've got tough choices, too. The difference is that they can seem uninteresting and unappealing, all covered over with musty math and congealed legalese. Even Will Smith would have trouble making that exciting. So, when Federal Reserve Chairman Ben Bernanke announced that the central bank would extend banking regulations to Wall Street firms, we hardly noticed. And when the Securities and Exchange Commission announced plans to adopt European accounting rules for U.S. publicly traded firms we went out for more popcorn. And when Congress pondered regulatory changes for commodities markets, we ... what's that? Sometimes we don't make decisions at all; we simply inch our way toward destiny. That's how we managed to get ourselves into a corner where the energy source we depend on most is controlled and doled out by people who do not wish us well. Fuel prices at least got people's attention and we now have solid news coverage of our efforts to put together an energy policy. People are genuinely interested. Economic policy should be so lucky. During the recent congressional hearings on speculators in crude oil markets, the issue of regulating the market -- and, by extension, all commodity markets -- came up. It was not unusual to have the subject of regulation come up in a congressional hearing. What was particularly interesting, though, was the argument put forth against regulation. Essentially, the idea is that if we attempt to regulate or clean up the crude oil futures market -- primarily to reduce the unwanted side-effects of speculation -- it will simply pack up and move somewhere else. The possibility of that outcome, of course, cannot be dismissed. But is that a good reason to sit back and let the markets do what they do? This is actually the same fundamental question raised by the important, but unexciting blah-blah-blah of the exchange commission. The agency's move to adopt the looser European accounting standards is based on the idea that it will make our stock market more competitive. Otherwise, so the argument goes, we will lose business and capital investment to markets in London, Paris and elsewhere in Europe. But is this the smart thing to do? If we are looking to attract global investment capital, how does it advance our competitive position to say, "We're just like those other guys?" That is not good business sense, let alone good economics. A better argument would seem to be that the turmoil and uncertainty of financial markets around the world are creating a demand for high-quality investments. Capital will flow to the market which offers the highest value, greatest opportunity and the lowest risk -- especially the risk associated with undisclosed information. The smart strategic move, then, would be to make the U.S. the place to go if you want an honest, straightforward deal for your money. It has been that, but the actions of our financial institutions have called our commitment to that principle into question. It is our financial institutions that not only got us into this subprime mess but also brought us the tech-bubble, the hedge fund debacle and the savings and loan disaster. It is not an accident that in the past 10 years investors in Treasury Bills received a higher return on average than those who put their money into stocks. The really smart money, as it turned out, went into the solid, low-risk investments. Bernanke is expanding the arm of the Fed into Wall Street's investment banks and is tightening up loan standards at lending institutions across the country. This is a good thing -- a bit late, but still a good thing. Regulation is not an end in itself, and it takes leadership and commitment to keep bureaucracies from turning simple rules into onerous millstones of mindless paperwork. Still, when our financial institutions repeatedly disappoint us, it is clear that they need a stronger hand. In this world we will be competitive by being strong, not by mimicking our rivals. If we have the strongest, the most efficient, the most ethical and the most open and information-rich financial markets in the world, we will have no worries about attracting global capital. James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.

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